How to avoid catch­ing a cold when China sneezes

The Chi­nese yuan’s sharp plunge this week, af­ter the Peo­ple’s Bank of China widened the trad­ing band, has led to un­der­stand­able ner­vous­ness in the mar­kets.

Re­gional cur­ren­cies, es­pe­cially of na­tions that do not have vast for­eign ex­change re­serves to pro­tect them, are go­ing weak at the knees.

In var­i­ous ways, Malaysia, South Korea, Thai­land and Tai­wan, not to men­tion Hong Kong, whose dol­lar is pegged to the green­back, are poised to bear the brunt of the yuan’s drop — a weak­en­ing that may not have ended.

China’s ref­er­ence to a “one-off move” in an­nounc­ing the de­val­u­a­tion has been dis­missed by the mar­ket, which is brac­ing it­self for as much as a 10-per­cent slide in the red­back’s value be­fore yearend.

For some time, it has been clear that the world’s No. 2 econ­omy is in worse shape than Bei­jing was let­ting on.

There is a pile-up of un­sold homes in Chi­nese cities. Sev­eral key in­di­ca­tors are down.

The cen­tral bank had been us­ing up con­sid­er­able amounts of its vast for­eign ex­change re­serves to shore up the cur­rency, to a point that it had be­come un­ten­able.

Based on all these, there was lit­tle rea­son for the yuan to have run up so much against the U.S. dol­lar in the past year, caus­ing a mis­align­ment be­tween the mar­ket’s view of the cur­rency’s ac­tual value and its of­fi­cial price.

Now, by weak­en­ing its money, Bei­jing has made its ex­ports more com­pet­i­tive.

More im­por­tantly, by mak­ing im­ports dearer, it has, in ef­fect, ex­ported the de­fla­tion it has been en­dur­ing at home.

This sig­nals the ner­vous­ness Bei­jing feels about the slow­down in its econ­omy with its likely knock-on ef­fects on so­cial sta­bil­ity.

One might ask if the global role it as­pires to is tak­ing a back seat now to pro­tect its own in­ter­ests first.

No­tably, dur­ing the 2008 global fi­nan­cial cri­sis and the Asian eco­nomic flu of 1997-98, China had re­frained from com­pet­i­tive de­val­u­a­tion.

There is a sober­ing les­son here for much of Asia, which has looked to the Chi­nese en­gine to power economies.

A US$10 tril­lion econ­omy ex­pand­ing at 7 per­cent adds US$700 bil­lion of out­put to the world, pro­vid­ing at­trac­tive pick­ings for ex­porters from Bris­bane to Bangkok, not to speak of Ber­lin.

The dou­ble-digit pace of ex­pan­sion of old is un­likely to ever re­turn. The gravy had to run out at some point, and it has. In time, the main­land’s growth cy­cle will re­sume but it stands against eco­nomic history to as­sume that a ma­tur­ing econ­omy will have the same legs of old.

Against this back­drop, South­east Asian na­tions would be wellad­vised to di­ver­sify their ex­port base, ac­quire and sus­tain com­par­a­tive ad­van­tage in dif­fer­ent ar­eas, speed up their eco­nomic in­te­gra­tion, and draw more strength from each other.

They also should widen their trad­ing hori­zons by, for ex­am­ple, strik­ing out in South Asia and Africa. This is an ed­i­to­rial pub­lished by The Straits Times on Aug. 15.